The big supermarket chains are to face a comprehensive, town by town, investigation into whether they force small retailers out of business.

Details of the new inquiry, which is scheduled to take six months, emerged as the Competition Commission unveiled the initial findings of its full-scale investigation into the £123bn UK grocery market.

The competition watchdog acknowledged that there is a "fear factor" among some farmers and suppliers in their dealings with the big supermarket groups. However, it rejected claims that Tesco owns so much land on which to build new stores that it will soon control nearly half the market. It said there was little evidence that the grocers were using their muscle to squeeze suppliers' profits and that food and drink manufacturers, and wholesalers, were in "reasonable shape".

The commission's decision to investigate local markets is bound to focus on the UK's biggest retailer, Tesco, which currently has more than 31% of the market and dominates food retailing in more than two-thirds of UK postal districts.

Peter Freeman, chairman of the Competition Commission, said he was "concerned about whether Tesco, or any other supermarket, can get into such a strong position, either nationally or locally, that no other retailer can compete effectively".

However, he also made it clear that it was not the commission's role to "punish success or individual retailers".

Retail analysts said the watchdog - which has the power to force stores to be sold off if it finds supermarkets are preventing, restricting or distorting competition - seemed broadly happy with the status quo. Richard Ratner at brokers Seymour Pierce said: "It would appear to be good news for the supermarkets, especially Tesco."

Clive Black at Shore Capital said the interim report would be "reasonably warmly received in Cheshunt, Tesco's head office". The shares of the major supermarkets were up slightly as investors decided the report was fairly anodyne.

The commission was called in to investigate the grocery business last May - for the third time in six years - after a vocal campaign by convenience store operators, backed by groups ranging from environmentalists to suppliers and the Women's Institute. They claim that the big supermarkets, especially Tesco, are driving independent stores and small suppliers out of business, using tactics such as below-cost selling, and turning high streets into so-called "clone towns", dominated by the same retailers.

Rivals Sainsbury's and Asda had also called for changes to the planning process to slow Tesco's growth. The market leader is now twice their size.

The commission, however, said below-cost selling represents only some 3% of the big grocers' total sales and could be beneficial to consumers.

It said there was no clear evidence that the supermarkets got better buying terms than their smaller rivals and rubbished claims made by Sainsbury's chief executive, Justin King, that Tesco would have up to 45% of the market if it built stores on the vast tracts of lands it already owns.

Mr Freeman said Mr King's claim was "without foundation", but conceded that the implications of the grocers' landbanks - and their use of restrictive covenants on parcels of land they sell, which prevents rivals buying it for stores - needed further consideration.

The big supermarkets own more than 300 undeveloped sites, and Tesco accounts for the majority. The competition commission said 12% of all grocers' land sales involved restrictive covenants.

Mr Freeman insisted the investigation was continuing and that no conclusions had yet been reached. He urged farmers and other suppliers to provide evidence if they were being unfairly treated and promised complete confidentiality to protect their interests.

Andrew Simms of the New Economics Foundation thinktank welcomed the "long list of critical issues" that the report highlighted, but warned the commission was being too soft: "The regulators are in danger of failing to grasp the full impact of the growing dominance of the big four supermarkets ... ghost towns and clone towns will continue to spread and we will be back with another inquiry to tackle the problem in two or three years' time."

Accountants Grant Thornton, which has acted for insolvent suppliers, also criticised the commission. Duncan Swift, head of Grant Thornton's food and agribusiness recovery group, said suppliers were increasingly facing "major financial distress caused by the market power wielded by the major multiples demanding ever cheaper products and longer payment periods".

The Association of Convenience Stores, however, welcomed the report, saying the commission had found "strong indications of anti-competitive practices". It added: "Overall we are one step closer to a fairer grocery market."

Sir Terry Leahy, Tesco's chief executive, said the report dispelled a lot of myths about the supermarket business, especially as it had found "no problems with the economic viability of manufacturers, processors or wholesalers".

He added: "All the evidence suggests that customers are very satisfied with the choice available to them and new stores continue to open all the time." He said the commission had no evidence Tesco had "systematically abused the planning process" and was confident the report's final conclusion would be that the supermarket business is "good for consumers".

Main points

· 59% of major retail planning applications are dealt with in 13 weeks

· Most of the 15% increase in milk price since 1999 has been retained by the retailers

· 67% of suppliers say gross margins have fallen over the past year

· Ten major grocery retailers said they engage in below-cost selling. One exception was Marks & Spencer

· Somerfield most frequently objects to rival planning applications

· The number of butchers in Britain has declined from 22,900 in 1980 to 6,600 in 2005

· Tesco granted consent for a new Extra store near Stoke-on-Trent in return for offering to build a link road

· One-third of local planning authorities believe supermarkets sit on development sites to block competitors

· Asda says curbs on out of town development constrain competition

· An estimated 40% of products sold in UK supermarkets are own-label

· 70% of suppliers make "marketing contributions" to supermarkets and 43% said they paid "other rebates"

· The supermarkets impose slotting and pay-to-stay charges on suppliers

· Grocery chains distribute 87% of UK bread

· Suppliers are forced to share marketing plans prior to launch if the supermarket has an own-label variety

· Many suppliers do not have written contracts and the grocers impose changes unilaterally